Research Discussion Paper – RDP 2016-06 Jobs or Hours? Cyclical Labour Market Adjustment in Australia

During a downturn, firms can reduce their use of labour by reducing the number of workers they employ and/or by reducing the hours worked by their employees. The nature of adjustment can have implications for the economy, particularly given the costs associated with unemployment; reducing employment is likely to be more costly than reducing hours. We explore the nature of cyclical labour market adjustment in Australia, using both aggregate time series data and an individual-level panel dataset of labour force transitions during the late 2000s downturn. We find that the share of labour market adjustment due to changes in average hours worked has increased threefold since the late 1990s. This has not been the case for the major advanced economies. We argue that the short and shallow nature of the economic downturns in Australia since the late 1990s has played a role in this, while labour market reforms may also have contributed. An important driver of cyclical adjustments in average hours during downturns looks to have been reductions in hours worked for employees who remained in the same job, as opposed to changes in the composition of aggregate employment.